One of the most asked questions to tax professionals is – What is the Voluntary Provident Fund? Why? Because it affects your monthly salary and further affects even your annual taxation. And for proper tax planning, you need to know things like VPF interest rate and VPF tax benefit.
The government has already made it compulsory for certain entities to form and manage provident fund accounts of their employees. To properly understand VPF and its implications, you should learn about VPF rules and VPF benefits.
So here we will be discussing it all and will give you more clarity about VPF and its various implications for working professionals. But before discussing any further, let's first try to answer the primary question – What is a Voluntary Provident Fund?
Did you know?
In an EPF account, an employee is required to contribute 12% of their basic salary and Dearness Allowance. Contributions to a VPF are voluntary—the maximum limit is 100%.
What Is a VPF?
We live in a world of social media, and most of the things we do in our lives are based on social media trends. And one such trend running around in the country is – investment. Thus, VPF contribution being an investment tool is interesting. And all this raises an obvious question in mind – what is a VPF?
As the name suggests, a Voluntary Provident Fund (also known as a Voluntary Pension Fund) is nothing but a voluntary contribution of an employee towards their provident fund. What makes it different from EPF is its voluntary nature. The VPF contribution by the employee is over and above his 12% contribution made towards EPF. The maximum VPF contribution can be 100% of their basic salary plus dearness allowance. The most important condition under VPF rules is that only salaried employees registered under EPF can contribute and get registered under VPF. Thus, this scheme is not for people who work in the unorganised sector or are self-employed. However, those people can surely opt for PPF, as it is a voluntary contribution scheme backed by the Government of India. It also acts as a good investment tool for them.
Benefits of VPF
The major benefits of VPF are as follows:
High Returns and Low Risk
These are ideal scenarios for an investor. In VPF, one gets a high-interest rate, and that too in a tax-friendly manner. Plus, the fund is backed by the government, making it a safe investment tool.
Ease of Operation
VPF provides for easy contribution as it is easy to open and manage. And even gets transferred to your new employer if the contributor is switching jobs.
Though there is no compulsion for contribution to the VPF account, if done, the employee is bound by certain VPF rules and should follow such rules to manage their VPF account.
Employees get various benefits for their contributions to the VPF. The government frames rules in a way to promote VPF contribution. Because of VPF, the government is trying to promote the habit of savings in the general public and especially employees. Because of the benefits and investor-friendly rules made by the government, it is the best long-term investment opportunity available for employees. Why? Because other than tax benefits, it provides high returns at a lower risk to the contributors.
What Is the Interest Offered for VPF Contribution?
The most beautiful thing about VPF contribution is the high VPF interest rate. VPF offers 8.1% of interest on the contribution made by the employee. The investment made in VPF is more attractive because of the tax benefits available on VPF contributions. The Government of India decides the VPF interest rate at the start of every financial year. The tax benefit on the interest amount and the maturity makes its real return (post-tax) higher than its counterparts. And this makes VPF a great tool against inflation.
The average interest you get under VPF is higher than the interest offered under EPF and PPF. It is partly also because of the no threshold limit on contribution provision made for VPF. VPF is a high return tool, and VPF rules are framed to increase the contribution towards VPF.
Are VPF Contributions Covered Under Section 80 C?
Section 80 C of the income tax act is the favorite section of taxpayers as it provides a deduction from total income. And thus, helping to reduce tax payable amount. The deduction under Section 80 C is availed by investing in government-recognized investment schemes or incurring eligible expenses. As per the latest tax laws, a person can avail of a maximum of ₹1,50,000 as a deduction.
VPF comes under the deduction umbrella of 80C, and the contributor can get an exemption of up to ₹1,50,000 each financial year. Not only this, but VPF contribution is a tax-free tool, and even the withdrawals (after five years) made under VPF are also tax-free. The VPF tax benefit taxation provisions promote VPF contributions among employees. No tax on long-term withdrawal makes it a perfect investment tool for a long-term investor.
Lock-in Period of VPF Contributions
VPF is a voluntary contribution fund made by the employee. The tenure of VPF is the same as the service tenure of the employee. However, VPF contribution doesn’t have any lock-in period like EPF or PPF, which have long lock-in periods of 15 years. In VPF, you can withdraw the money anytime, but it will attract taxation even if it is a partial withdrawal. However, one can withdraw money from the VPF account in the form of loans. And the final amount is paid to the contributor as and when the person retires or resigns. And in case of death of the contributor, the amount is disbursed or released to the legal nominee.
Also, the VPF rules allow the contributor to withdraw money anytime, making the VPF contribution highly liquid. Thus, a high return backed with a flexible withdrawal facility makes VPF a very attractive investment option for an employed person.
So, the VPF rules are framed to promote at least five years of investment, and we can say that the lock-in period of VPF contribution is five years.
Also Read: Registration of EPF Grievance Online
How to Start Making VPF Contributions?
After learning about the benefits VPF provides, the most burning question in your
mind must be – how to open a VPF account. Don’t worry, relax. We got this sorted for you. We will now discuss the procedure to make a VPF contribution and open a VPF account.
Making a VPF contribution is not rocket science. And the digitisation in the finance and banking industry has made it easier for the contributor to contribute hassle-free. With online payment options, the need for paperwork has decreased.
Not only the whole process of making a monthly VPF contribution is automatic. But the whole procedure to start your VPF contribution is easy too.
But for opening, you still need to follow some procedures, which is easier than opening a PPF account. Firstly, unlike PPF, you don’t need to open an account with a registered bank. All you need to do is convey your desire to start a VPF contribution to your current employer. And tell them to increase your EPF contribution. And what next you need to do is to convey the percentage of contribution you want as your VPF contribution. After increasing your EPF share, your EPF account will serve as your additional EPF or VPF account. The government provides after-contribution services like balance checks etc. You can check the VPF contribution balance on mobile phones via SMS.
With all the advantages, VPF brings convenience as the scheme is backed by the government and provides attractive benefits like high returns, lower risk, and tax-friendly income. Thus, it is a decent investment opportunity for employed individuals.